Good day, and thank you for standing by. Welcome to the Suncor Energy third quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today, Trevor Bell, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good morning. Welcome to Suncor's third quarter earnings call. With me this morning are Mark Little, President and Chief Executive Officer, and Alister Cowan, Chief Financial Officer. Please note that today's comments contain forward-looking information. The actual results may differ materially from the expected results because of various risk factors and assumptions that are described in our third quarter earnings release, as well as our annual information form. Both are available on SEDAR, EDGAR, and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian GAAP. For a description of these financial measures, please see our third quarter earnings release. Following formal remarks, we'll open up the call to questions. Now, I'll hand it over to Mark for his comments.
Great. Thanks, Trevor, and good morning, everyone, and thank you for joining us. Suncor's third-quarter results delivered in three key areas, operational excellence, increased shareholder returns, and significant debt reduction. Suncor delivered CAD 2.6 billion of funds from operations for the third quarter, while also completing the most significant maintenance year in our history on budget. The Downstream produced nearly CAD 1 billion of funds from operations, which included approximately CAD 80 million of FIFO gains. This performance marked the third-best set of Q3 results for the Downstream in its history. Year-to-date, we have reduced the company's net debt balance by more than CAD 3 billion and returned over CAD 2.6 billion to shareholders in the forms of dividends and buybacks by allocating over 70% of our funds from operations, including the tax refund received earlier this quarter.
Reviewing the progress we made on our commitments from earlier this year. Our nine-month annualized cash return is 9%. We've bought back over 4% of the company's shares since the program's initiation in February. The company's net debt level has been returned to year-end 2019 levels, and we remain on target to deliver our capital in line with expectations. In short, we are meeting or exceeding our commitments.
Our confidence in our operations and the pace in which we're executing our plan allows us to increase shareholder returns by doubling the current dividend to annually CAD 1.68 per share or back to the 2019 levels, increasing the buyback by a further 2% to 7% by February of 2022, all while expecting our net debt to be near the top end of our 2025 target range by this year-end, given the favorable macro backdrop. Turning to operating performance. Upstream delivered 700,000 barrels per day of production in the third quarter. Oil sands operations production of 370,000 barrels per day reflects the planned five-year U2 turnaround. This was partially mitigated by 90% utilization for in-situ, in spite of completing the planned maintenance at Firebag.
Looking at year-to-date cash operating costs of CAD 25 per barrel, we are progressing extremely well towards the bottom end of our full-year cash operating cost per barrel guidance. Syncrude achieved 185,000 barrels a day of production with 91% utilization for the quarter and cash operating costs of CAD 31 per barrel. At the end of the quarter, on September 30th, we assumed operatorship of Syncrude, a critical milestone towards achieving the previously communicated CAD 100 million in annual synergies in the first six months of operatorship and CAD 300 million in total annual synergies by the end of 2023. These synergies will contribute to achieve the cash operating cost target of CAD 30 per barrel at Syncrude. Fort Hills production of 51,000 barrels per day reflects a one-train operation.
We have made significant progress on overburden removal and slope stability and as a result, anticipate achieving full rates by year-end. We're right on plan with what we stated before, and we'll have both trains at full rates intermittently in November and December to ensure a seamless transition to full operating mode. Our expectation for 2022 cash operating costs per barrel is mid-20s, with an incremental 45,000 barrels per day of production. In our E&P operations, Q3 production of 94,000 barrels per day was an increase from Q2. However, our funds from operations of CAD 360 million reflects an inventory build associated with the timing of cargo sales. The sale of Golden Eagle was completed on October 22nd, with cash receipt of approximately $250 million.
In the Downstream, you will recall that we completed significant maintenance at all of our refineries in the second quarter. As a result, we're very well-positioned to take advantage of the demand recovery in the third quarter, and the refineries operated at 99% utilization with nearly CAD 1 billion of funds from operations. Compared to the CAD 3.8 billion-CAD 3.9 billion for full year funds from operations in 2018 and 2019 from the Downstream, the third quarter is in line with that run rate with slightly better cracking margins, but also with some significant headwinds. Average sweet and heavy differentials were $4 a barrel narrower. The Canadian dollar was 5% stronger, and natural gas prices were 125% higher.
In short, while the headline funds from operations this quarter is comparable to our 2018, 2019 run rate, there were considerable headwinds that we were able to offset through strategic improvements and investments in our supply and trading and logistics assets to further our competitive advantage. As discussed during Investor Day, the investments we've made and continue to make to achieve our CAD 2 billion of incremental free funds flow initiatives are building a business that's more resilient and stronger than ever before. As incremental demand continues to recover, we expect to capture higher margins. Reflecting back on the second and third quarter of this year, we delivered CAD 5 billion of funds from operations or nearly CAD 3.50 per share. Despite completing the highest maintenance activity across Base Plant, Syncrude and all of the refineries in our history, and with Fort Hills operating at one train.
Our assets continue to operate at strong rates, which positions us for significant improvement to our free funds flow generation in the fourth quarter and into 2022 and beyond. I'll now hand it over to Alister to go through our financial highlights.
Thanks, Mark, and good morning, everyone. For the third quarter, we continued to exceed our plan to increase shareholder returns and reduce debt. We returned over CAD 1 billion to shareholders in the form of CAD 310 million in dividends and CAD 700 million in share repurchases. During the quarter, our buyback amounted to 28 million shares or that's 20% more than in Q2 at an average of CAD 25 per share. In addition to the nine-month annualized cash return of 9%, we have also reduced our net debt balance by over CAD 3 billion, and CAD 2 billion of that came in Q3. Oil sands delivered approximately CAD 1.6 billion of funds from operations during the quarter. Although price realizations were higher during the quarter, these were partly offset by higher royalties, especially at Firebag, which turned to post-payout during the quarter.
We had anticipated this royalty change to be the middle of 2022. However, at current prices, post-payout has been achieved much sooner. Just to clarify, all our assets, except Fort Hills, are now in post-payout. Thus, the cash flow from these assets now fully reflects the royalty charges. As Mark mentioned, our oil sands operations cash operating costs continue to trend very well with year-to-date Q3 sitting at CAD 25 per barrel, despite increasing natural gas costs. You can see from the disclosures that higher natural gas costs added just over CAD 1 to our oil sands operations cash operating costs in the third quarter. Nearly half of this has been offset elsewhere in our business, including through higher power revenue.
We have updated our natural gas sensitivity to reflect the CAD 160 million funds from operations impact for every CAD 1 per GJ change in AECO. This sensitivity update reflects our integrated model view and includes power revenue, which is correlated to and does mitigate a portion of the natural gas cost. The E&P segment generated CAD 360 million of funds from operations with price realizations of approximately CAD 90 per barrel, delivering CAD 300 million of free funds flow net of capital expenditures. These results include an inventory build due to lifting schedules, which we expect to come through as additional funds flow in the fourth quarter. As Mark noted, we recorded our third-best Q3 results in Downstream's history, despite a less than normal business environment. I would like to put these results in the context of the demand.
If I look at Q3 2021 versus Q3 2019, average product demand across Canada was down nearly 7%. Suncor sales channels remained relatively similar to the same period, Q3 2019. The strong performance is a considerable driver towards capturing higher margins and is a direct result of strategic investments in a supply, trading, and logistics assets. We expect this trend to continue into 2022, with Suncor's Downstream capturing higher demand and higher margins and continuing to outperform the industry. Ending the third quarter, our net debt is CAD 16.7 billion, which includes capital leases. With the Golden Eagle sale proceeds of approximately $250 million received in October, the net debt balance stands at CAD 16.4 billion, similar to year-end 2019 levels.
As it relates to our guidance, our only change is due to increasing commodity prices, which of course does increase our cash taxes and royalty ranges slightly. Lastly, as I look at our performance for the remainder of the year, we are on track or ahead on both the net debt and buybacks. On our Investor Day, we outlined the five-year target to buy back approximately 12% of the outstanding shares. By the completion of the current program in February 2022, we expect to purchase 7% of the float, or said another way, achieving 60% of our planned buybacks over five years. With that, I'll pass you back to Mark.
Great. Thanks, Alister. With downstream delivering strong results, our assets operating at expected rates, and Fort Hills ramping up as planned, I'm really confident in our near and long-term business outlook. Further, we are resolute in driving down our cash break even by capturing the CAD 2 billion of annual free funds flow initiatives and Syncrude synergies we detailed at our Investor Day. Although I do acknowledge that the impact of higher commodity prices are impacting both revenue and cost side of our business. In 2021, we are on track to deliver CAD 450 million of incremental annual funds flow, largely through margin enhancements. For example, the Firebag and Edmonton debottlenecks, our trading optimizations, lower reclamation spend, and interconnecting pipelines.
Meanwhile, we are also on track to buy back the highest annual percentage of stock in the history of the company, while expecting to reduce our net debt by almost CAD 5 billion by the end of this year and be at the top end of our 2025 target range. Next year, through significant cost savings via improved productivity and synergies and further margin enhancements, we expect to generate an additional CAD 400 million of annual funds flow. Additionally, on capital, we expect to be CAD 300 million lower than the CAD 5 billion ceiling we discussed at our Investor Day. As I mentioned earlier, given our execution to date and the confidence in achieving our plan, the board has increased the dividend back to 2019 level. The next dividend will be payable on December 24, 2021.
This dividend will increase and set a new quarterly dividend payment at CAD 0.42 per share, up from the current CAD 0.21 per share. The board has also increased the current buyback program to 7% of outstanding shares, a further 2% increase to be purchased by February 7th, 2022. We fully expect to renew the current share buyback program upon its expiry on February 7th and anticipate continuing the buyback program at approximately 5% of outstanding shares at that date. Even with a significant increase to the dividend and continuation of the buyback program, we are planning to accelerate the pace of achieving the net debt targets. This reflects our confidence in the performance of our asset base and the strong free funds flow generation across our integrated model, taking advantage of strong commodity prices.
To put this into perspective, Suncor today is on track to deliver similar debt levels and a lower number of outstanding shares than it had in 2015. However, with 35% higher production, a resilient downstream, and a lower break even, our integrated model is stronger today than ever before, and we are now well into the execution of optimization strategy that maximizes the value from this model. As I look forward, I'm confident in our plan to ensure long-term value for our shareholders and a stronger and more resilient future for Suncor. With that, Trevor, I'll turn it back to you.
Great. Thank you, Mark and Alister. I'll turn the call back to the operator to take some questions. Operator?
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. One moment. Our first question is from Neil Mehta of Goldman Sachs. Please proceed.
Good morning, team, and congratulations on the announcement here today. What you're talking about, Mark, is a 7% buyback yield or up to that level, and now a 6% dividend yield. Can you kinda talk about what changed in the room to move from the 25% CAGR to this increased return of capital strategy? Just talk about the oil price bands at which we can think about you executing it. Certainly, at current constructive commodity price environments, it makes sense. If we dip lower again, do you still see the ability to execute towards the top end of that capital returns yield?
Yeah. Thanks, Neil. I appreciate it. It’s interesting because when we looked at it, there were really four factors that we looked at when we thought about setting this dividend increase. First of all, the confidence in safe and reliable operations, and you’ve seen that in executing the maintenance program or on Fort Hills ramp up and the progress that we’re making there. Secondly, the Downstream is back and delivering on the cash flow that we expected that business to do. We haven’t seen that for some time, given the impact of COVID. It’s providing significant and stable cash flow going forward. Execution of our CAD 2 billion of funds from operations, and you can see that in the comments I made about the Downstream and it delivering this cash flow despite the significant headwinds that I had highlighted.
Finally, when you look at it, all of the cash allocation other than our investments is being accelerated. You've seen it in our share buybacks. When Alister was talking about the share buybacks, we're now working on the 2023 share buybacks by the time we get to the end of this year from what we said before. We're actually working to get to the top end of our 2025 debt target. All of the cash and allocation of capital is being accelerated in all areas, and we felt it was appropriate to do that in the dividends as well. This is fully consistent with the 25% CAGR that we outlined. In fact, this is 75% of what we said we would deliver by 2025.
It's not inconsistent, it's just accelerated just like it is on debt repayments and share buybacks.
Mark, can you talk a little bit about the oil price bands and how we should think about the durability of this strategy, even in a lower commodity price environment if that plays out?
Yeah. Thanks, Neil. When you look at the durability of it, we went back and looked at this, well, what does this mean at the CAD 55 oil that we talked at? Given the fact that we've made so much progress on debt, one of the challenges at CAD 55 is you don't have the cash flow to restructure the debt of the company and to be able to buy back your shares and such. Given the fact that it's all accelerated, if we went to CAD 55 tomorrow, this is sustainable. We still generate free cash flow, and we can still continue to push forward on our debt and our share buybacks through that. We view that it's very sustainable.
The other piece associated with it, if you look at the work that we've done, we said we were just CAD 465 million of our CAD 2 billion has been delivered this year, so just under CAD 500 million. We have a similar amount next year associated with it. With cutting our capital by CAD 300 million versus the cap that we outlined, this also gives us, over this period of time, approximately CAD 1.2 billion, essentially, that we've turned over into the dividend. Even in this environment, we view that we're earning our way to actually deliver this dividend increase, albeit very accelerated, just like we're seeing in debt and in share buybacks.
Thank you. The follow-up question is around Fort Hills. That's the next big catalyst from our perspective to help reset the story. It sounds like based on your comments, you're feeling good about the progression. I know, Mark, you've been spending some time up there, but can you give us an on-the-ground perspective and the milestones we should be watching for to get confidence you're getting back to two trains?
Yeah. Thanks, Neil. It's interesting with Fort Hills because we've seen some significant progress. The team's really doing well. We're moving an awful lot of dirt there at this stage of the game. It's interesting just how much this has changed. The whole south face, we have all sorts of equipment in there working, so we've really been able to deal with that. We've been able to manage that whole piece associated with it. They're getting ready now to do test runs, as I mentioned, both in November, and then we'll start staging the asset up in December. You'll start to see nominations, particularly in December. You'll see an increase in noms as we get ready to and shipping on the pipelines as we get ready to bring that asset into full production before year-end.
We also remain on track to achieve our CAD 20 a barrel cost target in 2024, and next year, we expect it to be in the mid-20s.
Thanks, guys.
Thank you. Our next question comes from Greg Pardy of RBC Capital Markets. Please proceed.
Thanks. Good morning. I'd echo what Neil said. I mean, just a very, very strong quarter. I don't wanna get ahead of myself here, but Mark, does the reset of the dividend now negate consideration for the typical adjustment that you would do at year-end? In other words, are we good sort of on the dividend for the next year or so, or would you go through a normal planning cycle as you go into year-end and into next year?
Yeah. Greg, thanks for your question. You know, I guess some of this is kind of picking up on my answer to Neil, that when we did the Investor Day, we talked about the 25% CAGR through 2025, and essentially this accelerates and delivers three-quarters of that, now, a short time after our Investor Day. You know, we felt we had highlighted that this is gonna be front-end loaded, but obviously this is a lot more front-end loaded than we ever dreamt. Although the commodity price is significantly higher. All of these things, debt, repayment, share buybacks, and such, has all been significantly accelerated. You know, the management and board regularly assess our progress on where we're at and look at shareholder returns and how we're positioned.
All that said, given the significance of the move and stuff, we're really not expecting that, the board would choose to make any further decisions coming up in the next quarter.
Okay. Appreciate that. Very, very clear. The other thing is, I mean, you know, you look at all the moving parts in the oil market right now, obviously cost inflation, just costs in general. I guess the thinking on your end had been that you need a 35, you know, WTI breakeven to, you know, to cover sustaining CapEx and so on. With the dividend adjustment and all the other moving pieces, how should we think about that breakeven price now?
Yeah, that's actually a great question. Obviously, this is around affordability, right? It's one of the reasons that we had the breakeven and looked at doing that. This included all our operating costs, sustaining capital, and the dividend. Our focus was to be able to pay that in a CAD 35 world. With substantially higher prices and the current environment and such, including things like increased natural gas and FX rates and everything else, obviously, our breakeven is higher than that. Essentially, everybody's is that's consuming energy because energy is up so much. We remain very confident in delivering our CAD 2 billion. In this high-priced environment and very high commodity prices, you know, that's actually a challenge. Our breakeven is higher, but we don't see that as an issue in this environment.
Obviously, if the entire energy market declined, our breakeven will decline as well. You'll see us continuing to work on changing the structure of the company going forward. We lowered our capital in 2022, and we're confident that we can accelerate other aspects of our five-year plan. We haven't given up on it, but in the short term, for sure, our breakeven is higher than CAD 35.
Okay. Makes sense. Thanks, Mark.
Thanks.
Thank you. Our next question comes from Phil Gresh of J.P. Morgan. Please proceed.
Hey, good morning. My first question, just to follow up on some of your balance sheet commentary. The CAD 12 billion-CAD 15 billion long-term target, is that something that you would consider also, you know, bringing down with, you know, with the excess cash flow? Or would you rather kinda keep that target, maybe hit the low end of that target and return the incremental cash to shareholders? How do you kinda compare and contrast those two ideas?
Yeah. Thanks, Phil. Anyway, as we look at it, we, you know, you'll recall we set two targets out there. We set a 2025 target of CAD 12 billion-CAD 15 billion, and as Mark said, we're actually on track to achieve the 15, the top end of that range this year. That's an acceleration. We will continue to drive that debt down over the next few years. We also set a 2030 target, which was CAD 9 billion-CAD 12 billion, and we will continue to drive to that. If we have a commodity price environment whereby we can drive that down to those levels faster, we will do that. We're also cognizant of ensuring the shareholders get their return.
You saw us make a comment that free cash flow after CapEx and dividend will be allocated 50% to buybacks and 50% to debt reduction next year. That would be pretty consistent going forward.
Got it. Okay. Just to follow up on some of the operating cost commentary, acknowledging the higher price environment leads to some inflationary pressures for everybody. You know, it looks like your OpEx this year, based on your guidance, probably will be around CAD 11 billion for the total company. I guess, is it fair to think that, you know, from there, we should be looking at these, call it CAD 400 million of free funds flow improvement would be off that baseline as we move forward into 2022, as opposed to, you know, looking at the absolute targets from May because the cost environment has changed? Or just any further color on that would be helpful.
Yeah. I mean, it's interesting when you look at the overall cost structure. It's interesting when you look at OS&G because as Alister pointed out, we changed the natural gas sensitivity. It was for every CAD 1 change in natural gas, it was CAD 240 million impact, and we've revised it down to 160. These two pieces of it, one is the power revenue that shows up in a revenue line, and the costs actually show up in our OS&G costs. I mean, this is actually one of the complexities of it, so you don't really see it when you look at our unit operating costs. You see some of the impact of that, but it's mitigated by the revenue.
We're far more focused on our unit operating costs and staying on track to deliver the cost outlooks that we've had associated with it. We are seeing, you know, some impacts associated with that. A lot of the challenge with our CAD 2 billion this year is a lot of it showed up on the revenue side and very little in the cost side. You're not seeing the movement in the operating cost that, some expect, 'cause I think some people have just taken this, that it's all coming out of costs and such. Anyway, that's one of the challenges. I don't know, Alister, did you wanna add anything to that?
Yeah, I mean, I think it's important to realize, you know, obviously, we've had some impacts this year, but I think as we look forward to next year, I would say there's, you know, a couple of things that we're focused on and working our way through, availability of labor. I think you're seeing that across the industry. It's not just a Suncor issue. I would say that we're probably in an advantage position compared to others. We have a largely insourced workforce, which limits our exposure to service providers, where I think we're seeing others see pretty significant cost increases. We're not experiencing those to any great extent because of that largely insourced labor force. You know, general CPI in Canada is around between 0.5%-4.5%.
As we work through our planning and we get to guidance in December, we're obviously gonna give you some more details around those costs. I think there's more to come on this, but I'm not expecting any significant increase in costs here. We will be partially offsetting that inflation by some of these additional cost reductions that Mark talked about.
Right. Just one last one just on the operating cost. You said this is obviously the biggest turnaround year in history. Would you say that there was a material impact on costs or more, was it more just the lost volumes that came from that that would be an incremental tailwind in 2022? Thank you.
Well, Phil, you actually see it on both sides of the coin. Part of it is actually the turnaround itself obviously has some impact on the volume side. You see a bunch of this in capital because a lot of this sustaining capital is actually done on the work that we're doing physically on the assets. That said, we work really hard to try and normalize that from year- to- year so that we don't have these huge swings in sustaining capital and such associated with it. I would say you're gonna see it more on the volumetric side than you would see it year- to- year on the capital side.
Yeah. Okay. Thanks a lot.
Thank you. Our next question comes from Dennis Fong of CIBC World Markets. Please proceed.
Hi, good morning, and thanks for taking my questions. A couple of them already have been asked, but there's two that I have quickly on Fort Hills that I'd like to just probe about, and hopefully I'm not getting too ahead of myself here is, first, just with respect to the components around the wall stability kind of fixes and so forth, has there been any changes in terms of mine plan going forward, as well as has that changed the thought process around any debottlenecking or further optimization once this project is able to ramp up to full capacity, as well as maybe timing around hearing about incremental debottlenecking or efficiencies that you could gain?
Yeah. Thanks, Dennis. It's interesting with this because the mine plan has changed. Just because the south face was so rich with ore, we took a little different approach around how we are planning to mine that. Obviously, we're well into that now. There's been an enormous amount of work done since in the last quarter. You know, compliments to the team. They've really been going hard at it and making tremendous progress. You know, that said, to some degree, I would say it's a little bit of a separate issue when you set that aside. That's really around getting this asset ramped up, getting it to full rates, and delivering on 90% of nameplate capacity that we've always stated.
The issue about the debottleneck is there are opportunities, or we believe there will be opportunities to debottleneck the facility. On a few occasions, we've had it running to full rates, so that's very positive. We've made some tremendous progress looking at the facility and such. We're looking for this really to be the first year coming up in 2022, where we'll run the facility at 90% of nameplate capacity. Through that, we are getting the more we run the facility and then the more circumstances and conditions we run it, we see more and more opportunity around and a better understanding about how we could debottleneck the facility. But anytime you put this much capital on the ground, there's an opportunity to debottleneck and line it out.
It's always a little different than what it looked like on paper or in the math models. That's what we'll be paying a lot of attention to over the next year, and we fully expect that we will find opportunity going forward.
Great. Thanks. Maybe shifting gears, just to discuss Syncrude here. Now that you've, I mean, not spent a lot of time specifically operating the asset given the timing of when you've taken over operatorship, I was just curious in terms of we'll call it the first nine months of this year, as well as kind of what you understand with respect to the assets already given your interest in it. Have you found anything with respect to the interconnect beyond being able to showcase stronger utilization, help improve the quality of the feedstock into the Syncrude facility as well as mitigate downtime between both Base Plant and Syncrude? Is there anything further that we need to understand about that, just given that it's operated for several months this year thus far?
Yeah, Dennis, I don't think that there's anything beyond improving the feedstocks, increasing the utilization, and driving higher profit than what you've outlined. Those are super significant, right? We're seeing more and more opportunities. I think one of the things we're really excited about is we essentially had two separate organizations looking at the assets, trying to identify opportunities and then drive a you know, a discussion about, okay, well, how could we do this? Can we get a deal, get things going and everything else? Now we essentially have it all in the same organization, so we think that we'll be able to drive up the utilization of the asset and really leverage and maximize the value of the interconnecting pipeline. This is our first year. We've made some good progress. It's interesting how the opportunities come and go.
Sometimes they're in very short term, but, no, we're excited about the interconnecting pipeline. It's a huge lever in helping to improve the Syncrude asset. We think that with operatorship, this even sets a better foundation to maximize its value.
Great. I appreciate the color, and congrats on the accelerated returns, as well as hitting your target goals, ahead of time. Thank you.
Thanks, Dennis.
Thank you. Our next question comes from Menno Hulshof of TD Securities. Please proceed.
Good morning, everyone, and thanks for taking my questions. There's lots of chatter out there on the impact of higher natural gas prices on refinery processing costs for heavy oil in particular. It sounds like that's been a key driver of widening heavy differentials as refineries bid up light feedstock over heavy. My question for you is how are higher gas prices impacting your downstream margins and decisions on whether to process lights versus heavies? I'm focusing on the downstream side of things. In particular, I understand that you did provide that CAD 160 million sensitivity for natural gas for the Corp.
Yeah, Menno, it's interesting because I actually think that to a large degree, you're seeing that commentary come out of Europe, where they're paying, you know, orders of magnitude higher natural gas prices, because this is an area that has very constrained access to natural gas, essentially no storage. Their storage volumes are way below historical levels. I would say to some degree, the region is struggling with energy access just in its entirety. I really don't see it. In fact, that's one of the reasons that we kind of pointed out is that in my downstream commentary, we talked about delivering a Q3, the third highest in our history. We also talked about one of the challenges is natural gas price is up 125%.
The Canadian dollar is up 5%. You've seen much narrower spreads than what we've seen by CAD 4 on the light heavy. I really don't think in North America this is really a dynamic, but in Europe you see it much more. You know, maybe there's been a little bit widening of the differential. The beauty of our model is, you know, our whole model is designed that, look, whether the differentials are wide or narrow or whether the prices are absolutely high or not, we actually can extract the money within our model associated with it. We view that our model actually helps protect us against this. Just as we talked about on the power side, it's one of the reasons we modified our sensitivity.
Before, we were just showing you the impact on OS&G, but the offset here is in revenue. We think we're very well-positioned to be able to manage this. In North America, I don't see that as a really significant factor, although it may have some impact.
Just on a related note, would you ever consider getting back into the gas business? I know it was a big part of the business model back in the day, just to hedge out that price risk, or is it just not enough. There's just not enough sensitivity to even have that be a consideration?
Yeah, Menno, it's interesting because I think you'll see that our model, although very unconventional to a lot of folks, we see that we actually have impacts. As you see the cogen come on, our sensitivity to natural gas will change again and be mitigated further associated with it. You know, when you ask, "Would you ever?" I mean, maybe I'm getting old enough to know that to never answer the question in an absolute in that. Maybe there's a circumstance. Obviously, we're a big consumer of natural gas, and we continue to look at our positioning within the markets all the time. Our primary focus at this stage of the game is how to mitigate, obviously, increased natural gas prices, and power is the way that we're doing it.
Obviously, we're further investing to manage that further. Would we ever? Maybe we would, but not at this time.
Okay. Thanks for that, Mark.
Okay. Thanks.
Thank you. Our next question comes from Manav Gupta of Credit Suisse. Please proceed.
Hey, guys. I wanted to switch gears a little. You and some of the other bigger operators in Canada have come out with projects on carbon capture and sequestration. I understand it's pretty early, but just trying to understand, like, what kind of support would you need from the government of Canada to move ahead with this? Is it a firm carbon pricing? Is it basically supporting you with some kind of CapEx, you know, where they pitch in? I'm just trying to understand as these negotiations are proceeding, what kind of help do you expect from government to move ahead with the carbon capture program?
Yeah. Thanks, Manav. I mean, obviously, this is an area we're quite excited about. Obviously, we are a large emitter of CO2, and it's been fantastic to see the alignment amongst the industry peers and really being able to get an unprecedented alliance in the history of our industry within Canada to be able to chart a clear path moving forward. That plan is to take the whole industry to net zero by 2050. Obviously, there's a lot to that plan, but one of the key points in that is carbon capture and sequestration. We realized, as we worked on it, that as we worked as an industry, if we work together, we can drive down the cost significantly. This is about keeping the industry competitive.
If you look at Norway as an example, 2/3 of the capital and 2/3 of the operating costs for the first 10 years are actually provided by the government. In the United States, with Q45, we actually have incentives to be able to do carbon sequestration and that deals with both capital and operating costs. We need to have something that's competitive. We want to ensure that we can't afford to be investing below our weighted average cost of capital, of course. We're working to try and figure out, both with the provincial government and the federal government, what's the path forward. It's not just all monetary. Some of this actually gets into access to pore space and those sorts of things.
The great thing is we have a plan, and I think we have a great relationship with both the federal and provincial government, and we're looking to get alignment so that we can move forward.
Yeah. Thank you for that. A question here on the refining side. You were generating free cash in refining even during the worst of pandemic, and now obviously, you're generating a lot of free cash from refining. If you look at your refining, it's actually three parts, it's refining, it's logistics, and it's retail. I wanted to understand from the retail perspective, is this a business you want to grow? Is this a business you want to keep as it is? Or is it a business that you could potentially look to divest at some stage? If you can help us understand your views on your retail business within refining.
It's interesting, Manav, because we actually talked about this on our Investor Day, so I think there's some good material there that helps provide some context to it. I would actually add a fourth piece to this is our trading capability. You saw that in the last year, is that we were able to run disproportionately high utilizations in the refineries, leveraging our logistics network and our trading capability to deliver free cash flow when nobody else was. I think in our Investor Day, we talked about how we delivered twice as much operating cash flow in refining than our next nearest competitor within North America because of the combination of all of this capability that we've outlined. Retail is an important part of that. We have the number one brand in the country.
We have the largest coast-to-coast network. We have direct relationships with the customers that we can leverage as we think about adding energy options to the future. We see this as an important part of our model. I think I would just refer you back to that. Our team can actually walk you through some of those slides and stuff we did on Investor Day. You know, we think this is an important part, and we recognize that a lot of people have just sold this off and taken the cash out of it. We don't think that's the right answer for Suncor. The more we see the integrated piece associated with it, this was very helpful when we went through COVID.
Anyway, that's kinda where we're at with it, Manav, and that's why we've continued to position and continued to invest in this part of the business.
No, no, I completely agree. I don't think it should be moved out. It's integral part of the business. It gives you that access to the end markets where placing a barrel is important. My last and final quick question here is, 2021 was a year of very heavy turnaround for you, upstream and downstream. As we look at 2022, do we think the level of maintenance in both upstream and downstream should be lower? How do you expect to run in 2022 at both upstream and downstream versus 2021?
Yeah. It's interesting when you look at it, the downstream and upstream have lower turnaround activity. We still have a lot of maintenance going on, but we have lower turnaround activity than what we had in both sides of the house associated with it. Syncrude still has some substantial maintenance and turnaround work within the year. Firebag actually is gonna be off. We have a big piece of work associated with Firebag. I think the impact is something like 15,000 barrels. You keep in mind, Golden Eagle, with it out, that's about a 10,000-barrel hit. There's puts and takes across the platform. Turnarounds are lower, but we're still executing a bunch of work.
Some of this is what I said earlier to one of the previous questions, just about trying to flatten out and optimize our sustaining capital going forward so we don't have huge swings in that. Anyway, that's where we're at. You know, the beauty of it is that overall, you know, as we talked about during Investor Day, this optimization phase, 40% less capital than the growth phase we had. Next year, as we've highlighted, we're spending CAD 300 million below our 2022 ceiling. You know, I think we're trying to manage this well so that we can continue to deliver very strong returns to our shareholders.
Thank you for taking my questions.
Thank you. Our next question comes from Harry Mateer of Barclays.
Thanks. Alister, I think this one's for you. You know, one of the questions we often get is the concept of, you know, net debt versus gross debt, and you have net debt targets for 2025 and 2030 as you've laid out. Your capital allocation framework for next year also indicates paying down debt with cash, and presumably there's a limit to how high you want the cash balance to go, you know, as opposed to just doing gross debt reduction. Curious how you're thinking about that. Then the follow-up is, you know, when I look at your debt schedule, you still have CAD a couple billion of short-term debt, but at these sorts of prices, you spin through that pretty quick.
How are you thinking about the willingness to do more LME, such as did with the 2024s in the third quarter? You know, maybe not paying make-wholes, but you know, waterfall tenders, et cetera.
Yeah, that's a great question, Harry. I mean, I think you're right on there. You know, net debt versus gross debt, you know, we obviously don't want our cash balance to grow significantly, but somewhere in the CAD 2 billion-CAD 3 billion is probably reasonable. Just to emphasize to everybody, when we talk about net debt or debt in total, we include our leases of about CAD 3 billion, which companies in the U.S. don't do the same thing. I would say that as we're looking at all options as we go forward, we have short-term debt we'll pay down. We've got some maturities. Yeah, I think we'll be looking at liquidity management events so that we can take some of that longer-term debt out. You'll see us manage the debt profile.
You know, you may see us issue some longer-term debt, just to term out and increase maturities at the same time as we're taking shorter-term debt out. But all those options are certainly on the table.
Got it. Thanks very much.
Thank you. Our next question comes from Roger Read of Wells Fargo. Please proceed.
Hey, good morning, and good congrats on the better results. I admit to missing the first part of this call. We had quite a number of reports this morning. I would like to come back to the decision to reinstate the dividend to, you know, the pre-reduction level. What was the thinking kind of at the time of the cut, and what's the thinking today bringing it all the way back? One of the reasons I ask, we expected a dividend raise next year, but we didn't really think you'd get all the way back. I'm just trying to understand the confidence level that you have here and how that all came together.
Yeah. Thanks, Roger. Appreciate it. Really, if you go back to the dividend cut, and I think we've been through this on several occasions, is, you know, our focus was, hey, we're in a global pandemic. It's having a dramatic effect on global demand. Our view was, is we needed to keep the company financially strong. We took that decision. Essentially, any company in our analysis that cut the dividend has underperformed in the market. Then when you look at it, we really looked instead, there were four key factors when we looked at reinstating the dividend. One is just our confidence in the safe and reliable operations. We've just concluded the most significant maintenance year in the history of the company. Fort Hills is on track to ramp up, and so the business is looking really strong.
When you look at consumer demand, although it's off a little bit, you're seeing the downstream recover and providing significant and stable cash flows as we look to the future. We saw the downstream deliver in line in the third quarter with what we saw in 2018 and 2019. It's the third best Q3 in the history of the company for the downstream, despite challenges of higher dollar and such. The last piece that or the other two pieces is our confidence in the execution of delivering on our CAD 2 billion of free funds flow, CAD 465 million this year, and we're on track to deliver that in another amount similar to that next year. That's going very well.
The last one is really when you look at our share buybacks and paying down our debt, what we're working to, and Alister went through this, is when you look at debt, we're looking to be at the top end of our 2025 debt targets on net debt by the end of this year. We're actually now looking to buy back up to 7% of our shares, and we're working on the 2023 share buybacks that we talked about at Investor Day. We're just taking advantage of the high commodity price environment. We've made so much progress on restructuring the debt and such. Our view is we needed to keep the dividends up at the same pace.
You're seeing that what we talked about on Investor Day, the dividend increase is 75% of the dividend increase we talked about doing between now and 2025. You know, it's in line with the progress we're making on share buybacks and debt. Thanks for your question.
Yeah. Could I follow up with just an operational question? There's been kind of a crude diff question. You know, a lot of improvements in pipeline volumes to the U.S. with some of the stuff going on with Line 3. I'll presume Line 5 doesn't face any particular issues. Obviously, we've got the pipeline of the Trans Mountain Expansion. Can you just give us an idea of how you think about differentials moving, whether it's the light or the heavy crudes down south? You know, I understand you haven't faced some of the same differential issues that others have, the transportation issues. You know, a better market is a better market.
Just how we should think about that affecting Suncor as we look forward over the next couple years and how that maybe factors into your cash flow expectations, if it does at all?
Yeah, Roger, I mean, I think to some degree, this goes right to the heart of our model. Predicting differentials is very challenging. We've seen that in all these different markets. We saw an inventory build in Q2, which I actually found a bit surprising because, you know, there was lots of maintenance that was happening in the second quarter within the industry and such. It was seasonally high when you look at it relative to the last three years. You know, when you get into my comments in the prepared remarks and such, you saw the downstream perform really well with narrower diffs, strong Canadian dollar and a much higher gas price. I think there's several factors that are actually driving diffs around.
You know, Greg actually pointed one out in his question about natural gas and whether that's affecting lights and heavies and demand for lights. I think in some markets it is. I don't see it as a significant factor in North America. You're seeing increased crude coming in from OPEC. I think most of that's gonna be on the heavy side. And then on the positive for narrowing the diffs, you're seeing better access with line three coming on. So there's push and takes to it. We don't see a dramatic effect in the diffs one way or the other. The issue with it for us is we're fairly indifferent. We have an integrated model. It's designed to be able to pick up the cash either in the upstream or the downstream, depending on where the diff is.
We really don't focus on it all that much.
Okay, thank you.
Thank you.
Thanks, Roger.
I would now like to turn the call back to Trevor Bell for closing remarks.
Great. Thank you, operator, and thanks everyone for attending the call. I know it's a busy part of earnings season, so I appreciate your support and we're around all day if you have any follow-up questions. Thanks again, operator.
Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.